In a statutory appraisal action, the Delaware Court of Chancery recently adopted the deal price minus synergies as the best indicator of fair value. The court found one further adjustment to account for the change in the target’s operative reality between the date of signing and closing of the merger also was necessary. This is one of those increasingly rare cases in which the petitioners, as shareholders of a public company, obtained a price that was slightly higher than the merger consideration.
Background: The petitioners owned shares in Regal Entertainment Group (Regal). In February 2018, Cineworld Group (Cineworld) acquired Regal by way of a reverse triangular merger. The merger consideration was $23 per share. The petitioners owed shares in Regal. Regal’s board approved the merger agreement in early December 2017. In late December 2017, then-President Trump signed the Tax Act into law. Most changes took effect starting Jan. 1, 2018. The merger closed in February 2018.
Two required adjustments: The court looked to the deal price and found the sale process was sufficiently reliable to consider it the best evidence of Regal’s fair value as of the signing of the merger. However, this was a synergistic transaction. Under the applicable law, the court must determine the value of the company as a going concern, meaning the court must deduct any value derived from the expectation of the merger. The buyer, Cineworld, undertook detailed analyses as to the synergy value it could derive from the merger. Ultimately, this value was important to Cineworld’s financing. Much of the court’s analysis deals with how to estimate the value of synergy and how much of that value to allocate to the seller. The court was guided by the Delaware Supreme Court’s ruling in Aruba, which says a trial court has to make a synergy deduction, even if it is difficult to determine this value, using its best judgment.
The court noted that, here, there was evidence that the buyer had not overpaid for the target but had allocated some of the anticipated synergies to the seller. There also was contrary evidence that the buyer did not contemplate synergy value from the deal. The parties apparently did not bargain over synergies. Cineworld’s trial expert said he could not determine how the parties split synergies. He relied on a 2018 Boston Consulting Group (BCG) study that found that sell-side stockholders of the target company typically capture about 54% of synergies.
The court acknowledged it faced a less-than-optimal record and unsettled precedent as to what is necessary to prove a synergy allocation. It decided the 2018 study was “the best tool available for an imprecise task.” If the amount of the synergy value was $6.99, based on the study, the seller side captured 54% of it. Therefore, the court said, $3.77 must be subtracted from the deal price as synergy value.
A second, upward, adjustment was necessary as a result of the 2017 Tax Act, the court found. It noted that the applicable appraisal law requires fair value be measured by the operative reality of the company at the close of the merger. Both sides agreed that the company’s value changed as the new Tax Act lowered corporate taxes to 21%. The court noted Regal’s lowered tax rate reduced the amount of financial savings that the buyer could achieve. After the Tax Act, those financial savings were part of the value available to Regal in its operative reality as a stand-alone entity, the court said. It added $4.37 per share to the deal price minus synergies. As a result, the court decided the fair value of the petitioners’ shares was $23.60 versus the $23 deal price.
A digest of In re Appraisal of Regal Entertainment Group., 2021 Del. Cha. LEXIS 93; 2021 WL 1916364 (May 13, 2021), and the court’s opinion will be available soon at BVLaw.